CERTIFICATE IN BUSINESS MANAGEMENT Managerial Finance Managerial - PDF document

CERTIFICATE IN BUSINESS MANAGEMENT Managerial Finance

Managerial Finance – Lesson Synopsis Lesson 1 Introduction to Financial accounting Lesson 2 Ratio Analysis Lesson 3 Introduction to Management accounting Lesson 4 Preparation of forecast and Budgets

Accounting Lesson 1 Introduction to Financial Accounting

Introduction to accounting The key objective of accounting is to provide financial information for decision makers and other interested parties

Qualitative Characteristic of Accounting Information • Understandability. The information must be readily understandable to users of the financial statements. This means that information must be clearly presented, with additional information supplied in the supporting footnotes as needed to assist in clarification. • Relevance. The information must be relevant to the needs of the users, which is the case when the information influences the economic decisions of users. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users.

Qualitative Characteristic of Accounting Information • Reliability. The information must be free of material error and bias, and not misleading. Thus, the information should faithfully represent transactions and other events, reflect the underlying substance of events, and prudently represent estimates and uncertainties through proper disclosure. • Comparability. The information must be comparable to the financial information presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity.

Users of Accounting Information

Book-keeping Process

Book-keeping Process Book-keeping process is the recording of monetary transactions, appropriately classified, in the financial records of an entity, either by manual means or otherwise.

Book-keeping Process

Book-keeping Process 1. Transactions  A transaction is any activity in business that involves money. It occurs when something of value is exchanged with something else of value.

Book-keeping Process 2. Source Documents  Documents generated by the business as an evidence or proof of a transaction. Book-keepers extract information from these documents in posting to journals.  Invoices – for credit transactions  Receipts – for cash transactions  Cheque books – for cheque payments  Credit notes – for returned goods from customers  Debit notes – for goods returned to suppliers

Book-keeping Process 3. Journals  Book-keepers maintain set of books in order to reduce complexities in posting transactions to ledgers.  Sales journal – credit sales  Purchases journal – credit purchases  Cash book – payments and receipts of cash  The journal / General journal – different transactions which do not fall under above books

Book-keeping Process 4. Ledgers  An account is a record of transactions. A book of such accounts is known as a ‘ledger’.  The five main items recorded in ledgers are income, expenses, assets, liabilities and capital.

Book-keeping Process 5. Trial Balance  A listing of accounts that is prepared to check ‘the arithmetical accuracy’ of recording of transactions.

Book-keeping Process 6. General purpose financial reports  6.1 – Statement of Financial Position/ Balance sheet (Assets / Liabilities / Equity)  6.2 – Statement of Comprehensive income/ Income Statement/ Profit and loss (Income / Expenses)  6.3 – Equity Statement  6.4 – Cash Flows Statement  Also called the final accounts.  These are what is handed out to the users of accounting information for them to analyse and make decisions.

6.1- Statement of Financial Position  ASSETS  Items which the business ‘OWNS’ .  Resources that may be used by a business to derive revenue in the future.  Exa:  Land & Buildings  Motor-vehicles  Stocks/Inventories  Trade Debtors / Trade Receivables  Other Receivables  Cash in hand/ Bank balance

6.1- Statement of Financial Position  LIABILITIES  Items which the business ‘OWES’ .  an entity’s obligations to transfer economic benefits as a result of past transactions or events.  Exa:  Loans (Long term/ Short term)  Trade Creditors / Trade Payables  Other Payables  Bank Overdraft

6.1- Statement of Financial Position Assets which are not intended for sale or Non-current Assets disposal within one year ASSETS Assets which are intended to be sold Current Assets or used up within one year Liabilities which Non-current would be settled Liabilities over one year LIABILITIES Liabilities which would be Current Liabilities settled/due within one year

6.1- Statement of Financial Position  Equity / Capital / Shareholders’ Fund  The owners’ interest in the business  Includes; the money which the owners first invested (Share Capital) + Profits/earnings which the business made, but owners did not take back from the business (Retained Earnings)

6.1- Statement of Financial Position ASSETS CAPITAL EQUITY / LIABILITIES

6.2- Statement of Comprehensive income  The Income Statement (Profit & Loss Account/PnL) provides a picture of the company’s trading performance over the last accounting period (usually a year).  Prepared on the basis of; INCOME – EXPENSES = PROFIT  Rightly so, the last two items, INCOME items and EXPENSE items are picked from the Trial Balance and are inserted in the income statement.

6.2- Statement of Comprehensive income  INCOME  Generated through sales (Sales Revenue)  Maybe on credit and/or on cash  EXPENSES  Expenses incurred when making sales (Cost of Sales) and other general expenses (Expenses)  Maybe on credit and/or on cash  PROFITS  Gross Profit = Sales Revenue – Cost of Sales  Net Profit = Gross Profit – Expenses

6.2- Statement of Comprehensive income COST OF SALES = Opening Stock + Purchases – Closing Stock

Accounting Concepts

Accounting Concepts Accounting concepts refer to the basic assumptions, rules and principles which work as the basis of recording of business transactions and preparing accounts.

Accounting Concepts  The main objective is to maintain uniformity and consistency in accounting records.  These concepts constitute the very basis of accounting.  All the concepts have been developed over the years from experience and thus they are universally accepted rules.

Accounting Concepts Business entity concept 1. Money measurement concept 2. Going concern concept 3. Accounting period concept 4. Dual aspect concept 5. Accrual concept 6.

Accounting Concepts 1. Business entity concept Definition – This concept assumes that, for accounting purposes, the business entity and its owners are two separate independent parties. Thus, the business and personal transactions of its owner are separate. Year end accounts prepared for the business Application - CAPITAL DRAWINGS

Accounting Concepts 2. Money measurement concept Definition – This concept assumes that all business transactions must be in terms of money, which means, in the currency of the respective country i.e. Dollars, Pounds. Application – • All monetary transactions are recorded in financial statements. • Items such as loyalty, honesty, skills of employees are not recorded in the accounts.

Accounting Concepts 3. Going concern concept Definition – This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Application – • This is an important assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet. • Business credit is provided based on this assumption

Accounting Concepts 4. Accounting period concept Definition – All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. Further, this concept assumes that, indefinite life of business is divided into parts. Application – These parts are known as ‘Accounting Periods’ (i.e. Calendar Year / Financial year) and financial statements are prepared for these periods.

Accounting Concepts 5. Dual aspect concept Definition – This concept assumes that every transaction has a dual effect/aspect, i.e. it affects two accounts in their respective opposite sides. It means, both the effects/aspects of the transaction must be recorded in the books of accounts. Application - Dual aspect is the basic principle of accounting.

Accounting Concepts 5. Dual aspect concept  What are these dual effects/aspects...??? ‘T’ account Debit (Dr) Credit (Cr)

Accounting Concepts 5. Dual aspect concept How to determine Debit (Dr) and Credit (Cr)...??? ‘T’ account Debit (Dr) Credit (Cr) • Assets Increase • Assets decrease • Expenses Increase • Expenses Decrease • Capital/Equity Decrease • Capital/Equity Increase • Liabilities Decrease • Liabilities Increase • Income Decrease • Income Increase